Resideo from Honeywell

Summary

(12 Oct 2018) The Resideo spinoff has several things going for it including a drastic share spinoff differential from one of the largest industrial companies in the world. Resideo and Garrett industries are part of the Honeywell restructuring that was announced in 2017 to streamline Honeywell's operations. An appropriate price for Resideo does not indicate that it will have leverage upon its spin. A downturn in the worldwide economy or the housing market would adversely affect this company. I have set my entry point no higher than $27/share for this likely future household brand name.

Parent Ticker: HON

Announced Record Date: 16 Oct 2018

Announced Distribution Date: 29 Oct 2018

Anticipated Ticker: REZI

Business

Resideo is a global leader in the smart home industry. Resideo develops hardware and software that integrates with four major home automation systems- Amazon Alexa™, Apple HomeKit™, Google Home™, and Samsung SmartThings™ . Resideo is one of the few companies in this market that provides whoe home automation solutions to the contractor and the do-it-yourselfer. Most individuals will buy their products for the increased ease and security they provide. Installing smart technology into one's house will probably allow homeowners to demand higher prices for their homes in the future.

Parent Child comparison

Honeywell International is a diversified technology and manufacturing company, serving customers in Aerospace as a supplier of products, software, and services to OEMs; Home and Building helps homeowners in control of their comfort, security, and energy use; Performance Materials deals in process technology and automated solutions; finally, the Safety and Productivity division focuses on improving productivity, safety, and performance.

Resideo will be an independently operated company from Honeywell's Home and Building division. They are focused on the smart home market, a market expected to grow quickly over the next five to ten years. Resideo has a long-term commitment from Honeywell to market the Honeywell Home brand. They provide solutions that integrate with products like Amazon Alexa®, Apple HomeKit®, Google Home® and Samsung SmartThings®. This relationship providing devices for these programs will likely drive growth going forward.

Spin Ratio

Honeywell shareholders will receive one share for every six shares they possess on 16 October 2018.

Cash Flow

Cash flows from operations were $37 Million in 2017, $151 Million in 2016, and $128 in 2015.

Cash Position

Resideo pro forma balance sheet shows it will have $75 Million in cash and equivalents upon separation.

Revenue Projections

Barring changes in the market, Resideo will most likely have revenues of just over $4.5 Billion next year. Past growth is consistent with a stable market.

Dividend Policy

Resideo plans to pay a dividend beginning in 2019. This is the same policy of the Honeywell parent.

Management Actions

The CEO and CFO were both offered compensation packages that include restricted stock units (RSUs) equaling nearly 4x and 2x their annual salaries. This is to be completed by the fourth year of employment with Resideo. The equity benefits for all executive officers will not be greater than 1% of all shares outstanding because such shares are not available in their compensation plan.

Activist Investor Activity

Activist investor activity appears unreported.

Peer Comparison

Resideo appears to be one of the few companies that provides fully integrates smart home solutions. Therefore, comparison with other diversified industrials in the home construction market seems most appropriate. The EV/Operating Earnings ratio for Resideo's competitors is approximately 20.6 and their average EV/Cash Flow is approximately 24.0. This should price Resideo somewhere between $33.82 and $44.79/share. The reader should note that this valuation is based on only four other companies and may not present a large enough sample to give accurate information.

Opinion

Resideo is a great candidate for anyone interested in the home security market. An entry price below $27/share will likely provide significant returns to the interested investor. This will likely be the world leader in the smart home environment. The company, like many tech companies will likely be able to grow exponentially due to increased understanding of its customers by being able to provide 24 hour surveillance on them. The possible downside is a potential data breach like the one that Facebook recently had, can you imagine what would happen to a company in the home security market that had to explain how their servers were hacked and they left doors open to thieves?

SEC Reports

02 Oct 2018, FORM10-12B/A